Dutch disease

Most of you know, that one of the books that has shape my views has been “Age of Turbulence” by Alan Greenspan together with “Capitalism & Freedom” by Milton Friedman.

One of the subjects that stroke me the most from Alan Greenspan’s book was the “Dutch Disease”. According to Greenspan the term was coined by The Economist in the 1970s “to describe the travails of manufacturers in the Netherlands after the discovery there of natural gas.  Dutch disease strikes when foreign demand for an export drives up the exchange value of the exporting country’s currency.  This increase in the currency’s value makes the nation’s other export products less competitive.

“Paradoxically, most analysts conclude that, particularly in developing countries, natural-resource bonanzas tend to reduce rather than enhance living standards.”  Greenspan .257

Like always I like to dig in into concepts and opinions. I will add to Mr. Greenspan concept that is also an after effect of the “Dutch disease”, the diversification of the economy. When any country not just developing countries experience a bonanza on certain industry it tend to shifted the whole economy towards that industry, making the others less attractive. I mention yesterday the case of Pittsburgh, but they are many countries that have experience this, one of them is Cuba. This Caribbean Island was ask by the former URSSR of big production of sugar cane, the bonanza for the sugar cane in the 80’s was beyond real, but once URSSR collapse , Cuba pretty much lost their only market, things got ugly, and I believe is the same scenario that we are living right now with the numerous countries which their main production is Oil such as Saudi Arabia, Iran, Venezuela, and Russia. They go as far as planning their national budget base on certain average price of oil through year, but once Oil price collapse like they did last fall, things get ugly for the lack of diversification in the economy.

This is one of the main  reasons  why United States have such a strong economy, although we are shifting towards a consumption economy, we still produce commodities, cars, computers, software, airplanes,  and others, and as long as the dollar is the standard currency United States will be the first power of the world, and regardless of the collapse of certain industries such as auto industry and the real estate bubble bursting, the American economy is fundamentally strong.

When I said fundamentally strong, I am not saying we are getting better any time soon, but I believe new ideas with come through time catalyst by  the greatest system of all, capitalism with free markets, but this won’t happened until government take their hands out of their way, and let the markets work with modest regulation.

Pittsburgh “The Steel City”

Last weekend, I had the opportunity to visit the city of Pittsburg, 6 hours away from New York  City, although I must admit the sole purpose of the visit, was to keep up with my Major League Baseball park tour around United States, I did indeed learn a lot.

My first impression of Pittsburg, was kind of disappointment it in part helped by the condition of the weather, but also, by the “feeling” you get in the major city. You could tell as soon as you step in that has being going through a lot, and as I learn from my best friend Virgilio Pittsburg is a city that has relied uniquely on the industry of the steel. Once the steel industry collapse, in the early 1990, it was set for a hard and long recovery, since then they have learn the lesson that you cannot rely on  just one industry in any economic  environment  is like putting all your eggs in one basket.   The primary industries have shifted more to high technology, such as robotics, health care, nuclear engineering, tourism, biomedical technology, finance, and services; still the unemployment rate today is in 7.9% the highest since 1994,  with this conditions is normal that prices for different activities are considerable cheap, for example: I pay for first row tickets at BNC park home of the Pittsburg Pirates $ 27 , and the price of rent goes from $300 to$ 500. The perspectives according to experts for Pittsburg are not clear especially with the whole economic situation all around the United States and the rest of the world.

By coincidence in the week that I got there, it was just finish the event of the G20 (20 most powerful nations of the world), this event was heavily lobbied to be host in this city, with the idea of giving this city’s economy a boost, time will tell.

In conclusion, I think is a huge mistake for any community, city, or country to rely heavily in just one industry sector, it has been the mistake that Cuba made with the sugar cane, Saudi Arabia with the oil and Pittsburg with the steel industry.